Electrical Connection Winter 2015

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9 4 E L E C T R I C A L CO N N E C T I O N W I N T E R 2 0 15
TIPS
I n recent times, the number of
articles and blogs in business
circles written about the topic of
small business debtors and the ability
to get paid on time, if printed, would
probably be enough to cover the entire
country in paper.
I certainly know that I have covered
this topic in the past and yet the issue
of not being paid on time is still one of
the biggest hurdles for small businesses
to overcome.
The cost of not getting paid on
time and the resulting impact on a
small businesses cash flow can be
catastrophic.
The costs of poor debtor management
and cash flow can be measured in the
following ways:
x Straight up bank interest on
overdrafts, credit cards and lines of
credit that need to be used in place of
real paid cash.
x The cost of supplier penalties for
late payment due to a lack of cash.
Especially the ATO which currently
charges 9.36% on unpaid debts.
x The missed opportunity of not being
able to take advantage of supplier
discounts for early payments.
x The pure cost of having a staff
member or accountant chasing
debtors, spending time on the phone
and so forth.
x The missed opportunity to earn bank
interest or other investment income
on surplus cash flow.
For even the smallest of businesses
the costs we’ve mentioned have the
ability to represent a significant and
tangible amount of money. This, of
course, has the potential to create an
out of control spiral as the above factors
then affect the next period’s cash flow
and so on, until businesses are unable to
pay their debts and eventually close.
It doesn’t need to be this way. I don’t
intend on repeating the many articles
on practical cash management tips, I
wrote a similar article on the topic just
over 12 months ago. The focus here is
to emphasise the absolute must of a
business to make sure every client or
customer is fully aware of exactly what
they are getting for their money. In doing
so, you prevent angst and frustration
on the other side of the fence. This
frustration with receiving unexpected
bills and deadlines for payments can and
does lead to longer payment times.
Remember, you may be invoicing
business to business, but there are real
people at the other end of the process
and their emotions can and will affect
how quickly you get paid.
The key is to follow these five pointers
to maximise the ability of your customers
to be willing to pay you on time:
1. Should a client engage you to provide
a quote, do so promptly and always
specify an expiry date on the quote
so you aren’t left short by supplier/
material price rises. The initial quote
should demonstrate a timeline of
expected progress payments or at
least an anticipated deadline for the
work involved with a short payment
term at the end of the project.
2. Where large quantities of materials
are needed to satisfy a client’s work,
always get an upfront deposit. If you
need to purchase $10,000 worth of
materials on a 30 day account and a
job takes two months to finish, and
then 30 days after that to get paid
(if you’re lucky), your business is
effectively cash negative to the amount
of $10,000 for a full two months. Refer
to my original point above on what this
is going to cost you!
3. Documented payment terms must
be attached to the engagement
document, whether that be a quote,
an upfront invoice or any other form of
agreement to provide services. If you
don’t have documented legal payment
terms, speak to your solicitor. It’s a
short term cost that can save you
thousands in the long run.
4. Be aware of what accountants refer
to as “scope creep”. This is where you
quote for an agreed service at a fixed
price. Subsequent to this the client
expects more and more of you and of
course you comply with their requests
to keep them happy and to keep the job
progressing towards its completion.
Any and all additional work needs to
be invoiced as per the terms of your
agreement; see why you need one?
5. The previous point reinforces the need
for a detailed quote or engagement
letter so both parties know what
is and isn’t covered. By protecting
yourself you also inform the client. An
informed client cannot then get upset
with an additional invoice for extra
work, especially when they initiated
the work. Always do as best you can to
issue a new quote for any extra works
that can be treated as a signed legal
document in the event of a dispute.
Cash flow is the lifeblood of all small
business, without a steady stream of
cash flowing into your bank account, you
are hampering your businesses ability to
not just grow, but survive.
The costs and missed opportunities
of absent cash are real and measurable.
Take a look at our list of potential costs,
if you have a large amount of interest
expenses in your profit and loss, are
always scratching around or calling
clients at the last possible minute
begging for them to pay you then it is
our sincere hope that these pointers
has prompted you to take a look at your
business procedures from top to bottom.
The way you quote, communicate,
work with and follow up with your clients
all has a direct impact on your bank
account balance. Remember it is your
money and if you go about it in the right
way, your money will be yours sooner.
Based in Sydney and Melbourne, mas
accountants has been around helping
small businesses for over 50 years.
GO WITH THE FLOW
Cash flow is a whole of
business system, not just an
invoice and collect system.
John Corias explains.